Call them what you will – stated income loans, liar loans, no-doc loans – they are all the same thing. Borrowers do not verify their income in the traditional way, yet they still get the mortgage they need. We saw a huge decline in these types of mortgages during the last ten years as the housing industry took a major hit. Lenders were less enthusiastic about providing loans to those borrowers that could not fully document their income. In fact, the Dodd-Frank Act and the Ability to Repay Rules made it near impossible to give a loan to anyone that could not fully document their income and then some. Today, the restrictions are lightening up and more and more self-employed borrowers are becoming homeowners. As the self-employed population increases, the number of stated income loans will likely increase as well; here are the two largest differences between the guidelines for full document loans and stated loans.
High Credit Score
Traditional loans, aka conventional loans, need a high credit score to qualify; this has always been the case. If you have even average credit, it can be hard to find a conventional lender willing to take a chance on you. This is especially true today with the government allowing borrowers to take legal action against lenders that do not do their due diligence in ensuring that every borrower can fully afford the loan they are being given. If your score is below 680, you will have to have some serious compensating factors to make up for the “lower” score if you want to qualify for traditional lending.
Stated income loans, however, do not require credit scores as high as traditional loans and for good reason. Most borrowers that need a stated income loan are self-employed. When you are self-employed you have expenses both on the personal and business side and sometimes the line between the two is blurred. This means that your business expenses might lean on over into your personal credit reporting. Business expenses are often paid late due to circumstances outside of an entrepreneur’s control. When this happens, the personal credit score gets affected, which can mean no mortgage approval in the traditional sense. The good news is that most lenders that offer stated income programs accept slightly lower credit scores.
Varying Down Payments
On a conventional loan, the standard down payment is 20 percent for a standard approval. Of course, there are exceptions to the rule – there is even a Fannie Mae program that allows a 97% loan-to-value ratio, but typically, lenders want 20 percent down. If you do put less than that down and are able to get approved, you will pay private mortgage insurance until the loan-to-value ratio of your loan gets below 80%.
With a stated income loan, though, you do not have to put down 20%. Basically, the higher the down payment, the higher the likelihood of getting approved; it is a direct relationship. If you put down less than 20 percent, but are still able to get approved because you have the credit scores, assets, and debt ratio to qualify, though, you do not have to pay private mortgage insurance. Many lenders even allow as little as 10 percent down or 20 percent down with 10 percent coming from your own funds and the other 10 percent coming from an approved gift source. The tradeoff is that you will likely have a higher interest rate, but in the end, the payments are typically similar as you weigh the difference between paying PMI and a higher interest rate.
If you are self-employed, do not assume you cannot get approved for a mortgage. You might not be able to obtain the traditional, conventional loan that you had in mind, but there are many self-employed, stated income loan options out there for you. Talk to various lenders to see which programs each lender offers as these programs are portfolio based and can change from lender to lender.